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Environmental Assets
Put Your Money to Work for Good through Impact Investing

June 2015
UBS Financial’s Frank Cannon (left) and Phil Toohey enjoying waterfront views.

UBS Financial’s Frank Cannon (left) and Phil Toohey enjoying waterfront views.

According to the 2014 Report on “US Sustainable, Responsible and Impact Investing Trends” from the US SIF Foundation, assets managed under sustainable, responsible and impact investing (SRI) strategies in the United States grew by 76 percent from 2012 to the beginning of 2014, when $6.57 trillion was invested in companies or products seeking to achieve positive impacts on society. That’s one in every six dollars professionally managed in the United States.

In the past, advisors were sometimes hesitant to embrace SRI strategies, such as climate change, water conservation and energy efficiency, out of concern for limiting returns. But as more and more companies are addressing sustainability, we believe it is becoming easier to make the case for these types of investments.

In fact, sustainable investing, properly implemented, goes beyond the mere integration of environmental, social and governance issues within the investment process. One could argue that it could simply be called “investment,” because it takes into account all the important points in the investment decision-making process.

Within this trend, there has also been a shift away from the more traditional socially responsible investing, which tends to be fairly passive, to the more active, engaged impact investing. Investors today want to see the results of their investments – not just their own personal ROI, but also the impact they are making on companies and causes, whether it’s helping secure clean water in Haiti or working to prevent disease in Africa.

But how do you make a connection between the source of a problem and ways to be part of the cure?

You should look for companies to invest in that are creating technology and products that address the issues you care about. Investors wishing to delegate the screening process of companies pursuing endeavors consistent with their beliefs may choose to have an investment professional manage a diversified portfolio for them. This article will focus on investment decisions that can make an impact on environmental issues, but the same advice applies to other areas of social responsibility, as well.

Take, for example, the Chesapeake Bay, a cause that specifically affects Baltimore, Washington, D.C., and all of Maryland. The Chesapeake Bay Foundation’s 2014 State of the Bay report determined the Bay’s health index as 32 out of 100 (that’s a D+), based on information related to habitat, fisheries and pollution. Polluted water can have negative effects on public health, the environment and local economies. Bay contamination is caused primarily by nitrogen and phosphorous, and the foundation has identified agricultural runoff as the largest source of pollution to the Bay.

What can an investor do? Those looking to invest in solutions to improve the water quality of the Bay might consider companies that are creating products and services that improve the way fertilizer is used. For example, one company has developed GPS technology that allows farmers to create maps based on soil samples or yield to determine precisely where fertilizer needs to be spread, as well as application control to apply the correct amount and avoid overlap when spreading.

Crop irrigation is the largest consumer of available fresh water, and fields using modern irrigation not only save water but also experience higher crop yields.

Crop irrigation is the largest consumer of available fresh water, and fields using modern irrigation not only save water but also experience higher crop yields.

Water conservation is another important issue. According to the World Wildlife Federation, only three percent of the world’s water supply is considered fresh and suitable for drinking, bathing and irrigating crops. The organization predicts that by 2025, two-thirds of the world’s population could face a water shortage. Combine this water scarcity with population growth in emerging markets, and the world faces a potential strain on the food supply, particularly as the production of protein such as beef, which requires more resources than plant-based foods, increases. This isn’t just a global issue – local farms also have a need to increase crop yields and decrease water usage for greater sustainability. Crop irrigation is the largest consumer of available fresh water; the Food and Agriculture Organization of the United Nations has found that approximately 84 percent of global grain production is produced without modern irrigation systems. Fields using modern irrigation not only save water but also experience higher crop yields. One can’t help to believe that the cost of fresh water has to go up as usage increases.

How can you impact water conservation through financial investment?

One way is to identify technology that is creating greater efficiencies in how water is used to grow crops. Irrigation equipment and technology can help farmers reduce their water usage to achieve maximum productivity. If you’ve driven through Maryland’s Eastern Shore, you’ve probably seen the irrigation machines crawling like metal spiders through the fields on either side of the highway. According to the American Farm Bureau, these machines “integrate factors related to soil, crops, nutrients, pests, moisture, historical yield, regulatory limitations and many others to pinpoint almost exactly where water is needed.”

There are additional water-specific investments that can offer individuals an opportunity to invest in companies engaged in conserving and purifying water for homes, businesses and industries. The fact is, the worldwide water industry is one of the most valuable of all commodities. In 2011, Global Water Intelligence estimated the global water market at $316 billion. As the world’s population and water demand grows, companies involved in all aspects of this industry will look like attractive investments.

Another critical issue facing our environment is the burning of fossil fuels including coal, natural gas and oil for energy and transportation. Fossil fuels are some of the biggest contributors to Carbon dioxide (CO2/GHG) emissions that find their way into the Chesapeake Bay through rain and runoff. Investors wishing to have an impact on the lowering of these emissions have the option to consider environmental investments that are completely fossil fuel free or investments that favor companies with commitments to reducing carbon emissions.

Or, instead of making investment decisions related to reducing the use of fossil fuels, you might consider investing in companies involved in increasing energy efficiency. Energy efficiency improvements can yield both energy savings and reduced carbon dioxide emissions. In recent years, stricter regulation with a view to protecting the environment and securing the supply of energy has been a powerful driver, boosting efficiencies in buildings, cars and power generation. Energy efficiency addresses a whole range of issues, such as the sought-after reduction in the use of fossil energy sources and the lack of storage technologies for renewable energies. Companies producing electricity measurement devices, efficient lighting and heating management systems, and efficient transformers for buildings and electric vehicle recharging stations are just some examples.

Sustainable investing has evolved to an established field and has a growing investor base. It now capably fulfills the needs of multiple types of investors, while offering performance comparable to conventional approaches. Environmental investments include companies that are developing innovative solutions such as renewable energy and energy efficiency, water infrastructure technologies, pollution control, waste management technologies, environmental support services, and sustainable food and agriculture. Whether you’re one of the 17 million people who live, work, and play in the Chesapeake Bay watershed or you’re passionate about water conservation, reducing the use of fossil fuels or other sustainability issues, when developing your financial plan, consider impact investing. It is a way to not only make a difference in causes you care about, but it also can be a smart financial move.

Frank Cannon and Phil Toohey are First Vice Presidents of Wealth Management at UBS Financial Services Inc. in Baltimore. Cannon can be reached at James.Cannon@ubs.com and Toohey can be reached at philip.toohey@ubs.com. I95

 

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